Money Market Fund Messaging: Rejection Does Not Resonate

The highly regulated mutual fund industry has largely been spared from the post-2008 financial crisis reforms-except, of course, for money market funds which can't seem to move off the regulatory target zone.

It appears money funds might be closer to undergoing more restructuring since Securities and Exchange Commission member Luis Aguilar recently agreed to reconsider at least a version of the controversial reforms that have been sitting on the table.

That means the years-long logjam over how to further respond to the 2008 Reserve Primary Fund "breaking the buck" catastrophe could finally be over, with significant restructuring a real possibility.

The industry has over the last few years locked horns with the SEC over these proposals-one of which would require a floating net asset value (NAV). Firms responded very publicly, criticizing the plans for the most part as unnecessary and potentially deadly to the money market fund industry.

Mary Schapiro, now the former SEC chairman, tried to push new changes through while at the helm, but found opposition with Aguilar, who refused to vote for her reforms, effectively denying her the majority she needed. The chairman backed down and the proposals sat idle. But it wasn't long before other forces stepped in to pressure the SEC to act. U.S. Treasury Secretary Timothy Geithner spoke out, as did the Financial Stability Oversight Council (FSOC). Just recently, Aguilar seemed to capitulate, stating he would now be open to Schapiro's floating NAV proposal. He pointed to a new report the SEC released that he said delved deeper into the causes of investor redemptions in 2008, and that seemed to alter his thinking, but the buzz is he was perhaps pressured into conceding.

So, it seems the torrent of comment letters, hearings and studies, and heavy spending for lobbying and advertising over the last several years may have been less effective for the industry than expected, and firms might need to develop more strategic PR campaigns now that regulators seem to have the support they need to forge ahead with that controversial reform. The question is, what should firms' messaging be now?

The industry has argued that further reforms could not only render money market funds economically unfeasible, but could actually increase systemic risk. Firms came out pretty heavily against the SEC, and that had the effect of pushing the issue to FSOC, a regulatory body some think may be less sympathetic to the industry than the SEC.

There is the question of whether there is a danger in vociferously opposing the SEC, and whether firms may pay a price for lobbying so publicly against the regulator charged with protecting the interests of investors.

In addition, mutual fund firms face the potential for FSOC to designate them as systemically important financial institutions-perhaps further engraining in the public's mind that money market funds are vehicles of instability, volatility and potential causes for destructive runs.

If regulators have succeeded in publicly designating the funds as risky investments, firms can choose to replace them with alternatives or they can implement any reforms with a conciliatory smile, and wait to see the outcome.

Firms who uphold their opposition risk being dismissed as unreasonable or unrealistic in the minds of investors and regulators, and could be well served by being more open to change. If reforms are inevitable, this might be a wise choice.

It might be to their advantage to make more public concessions, especially if FSOC is poised to come around and label them as systemically risky.

If a damaging market event unfolds and the SEC's reforms appear to save the industry from another Reserve Fund-type run, firms that so publicly opposed the reforms will have some explaining to do. It's possible that another 2008-like crisis won't happen, at least not any time soon, and the policy debate may never actually be resolved. The conflicting messaging would be all that remains.

A floating NAV would be uncharted territory for firms and regulators alike, and it remains to be seen how investors will react. It's possible that the funds-for a variety of reasons-will simply become less attractive to investors, with or without another crisis.

Money market funds, however, will undoubtedly remain a focus for regulators in 2013, and the SEC could move to push through not only a floating NAV, but other unwanted reforms such as requiring a capital buffer, a minimum balance at risk for fund investors, and a temporary gate on redemptions. Elisse Walter, who just took Schapiro's place, has been a supporter of more regulations.

It's not clear whether the two sides will reach a happy compromise, or if the issue will end up in the courts. But if the SEC gets the final word, the messages that come from the industry now may be the messages that resonate most with the public. It may be beneficial for firms to take steps to address the concerns instead of marketing a wholesale rejection of them-regardless of who's right on the policy matter.